Every entrepreneur knows that access to working capital finance is imperative to run and grow their business. If you are serious about your business growth, you can raise the required funds by leveraging assets you already own. In other words, you turn your past investments in property, equipment, or machinery into future opportunities. Secured capital finance provides the necessary funding to hire more personnel, purchase new machinery, or expand business operations. But what are secured loans, and how do they benefit a company? Let’s take a detailed look.
Table of Contents
Secured loans are backed by property or equipment as collateral. It serves as the loan security, and if you fail to repay the loan, the lender has a legal right to seize the collateral to compensate for the loss. While it sounds risky, a secured loan can be an excellent funding option if you need access to working capital management.
The primary benefit of a secured loan is that it typically has a lower interest rate than an unsecured loan. That is because the collateral security cushions the lender in the event of default. Moreover, since these loans are less risky for the lenders, they usually offer favourable terms and conditions like bigger loan amounts and longer repayment periods. Such features give you the financial independence to grow, expand, and succeed.
Here are some ways a secured working capital loan can help your business grow faster:
● Loans at Lower Interest Rates
A lower interest rate is one of the biggest benefits of a secured loan. That is because the loan provider has less risk in lending a collateralised loan. It helps you save money on the interest outgo, giving you more money to invest in the business. As a result, your business can grow, and you can achieve goals faster.
● Increased Borrowing Capacity
While lending institutions have lower limits to the amounts they can lend without security, the loan amount for a secured loan depends on the collateral you offer. If you pledge a real estate property as collateral, you may qualify for a much larger amount than an unsecured loan would have provided you. It is highly beneficial if you need a considerable amount to finance a major expansion project.
● Longer Repayment Terms
Secured working capital loans come with longer repayment terms than collateral-free loans. Such a repayment schedule gives you more time for loan repayment, making your EMIs more manageable.
● Fixed Monthly Obligations
Look for a loan company providing fixed interest rates on secured loans. Such loans have fixed monthly instalments throughout the loan term, making it easier to budget the finances and plan timely repayment.
● Complete Business Control
Compared to other business finance options like equity, Business Loans keep you in complete control of your business. You don’t need to share your profit or company ownership with investors.
● Access to Tax Benefits
Depending on your loan usage, you might be eligible for tax exemptions and benefits. For instance, if you borrow a Business Loan under the ECLGS scheme and use it to purchase equipment or property, you may get tax benefits on the interest payments.
Let’s explore the benefits of getting secured working capital loans for business:
- Lower Interest Rates: Since a secured loan has collateral support, it has a lower interest rate than an unsecured loan. That is because the lender feels more confident about getting their money back.
- Longer Loan Terms: Secured loans have longer repayment terms than unsecured loans due to less risk involved for the lender. That means you have more time to repay the loan without worrying about hefty EMIs.
- Higher Loan Amounts: Leadinglending institutions like Hero FinCorp are willing to lend higher amounts due to less risk involved with a secured loan. Moreover, the loan amount you receive depends on the LTV ratio that the lender offers. The higher the asset’s value, the bigger the loan you may get. Conversely, if you apply for an unsecured loan, lenders have the upper limits on the amounts they can sanction.
- Repayment Flexibility: Many lenders offering secured Business Loans willingly create a repayment plan suitable to your budget. Use an EMI calculator to choose a loan term with budget-friendly EMIs.
- Helps Build Credit: A secured loan can help build business credit with regular repayments. That means if you borrow a secured loan and pay its EMIs on time, you can build your credit score to improve your future credit access.
Now that you know how secured loans work, it’s time to shop around and grab the best deal. Here are a few points to keep in mind:
- Decide Collateral: Real estate is one of the most common types of collateral. However, some lending institutions also accept inventory, equipment, and business accounts receivable as security. To sum up, any asset of value that the lender can sell to recoup their money can be used as collateral.
- Compare: Instead of taking the first loan plan you receive, shop around and compare the different loan offers from various lenders. Compare their LTV ratio, interest rates, repayment terms, eligibility and documentation requirements, etc., to ensure you get the best deal.
- Determine the Risk: If you fail to repay the loan, you will lose the asset you pledged as collateral. So, before applying for a secured loan, decide if you are ready to take such a risk. Ensure a plan B is in place to repay the loan and prioritize EMI payments.
Borrowing a secured working capital loan is an excellent funding option for SME owners with some kind of collateral to pledge as security. However, understand the risks and compare the loan plans to get the best deal before applying. Look for government business finance schemes like the ECLGS scheme to get the required funding according to your needs and repay on time to build credit.
Hi, I’m Dev Kirtonia, Founder & CEO of Dev Library. A website that provides all SCERT, NCERT 3 to 12, and BA, B.com, B.Sc, and Computer Science with Post Graduate Notes & Suggestions, Novel, eBooks, Biography, Quotes, Study Materials, and more.